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Journal of Hospitality & Tourism Research, Vol. 20, No. 2, 15-29 (1996)
DOI: 10.1177/109634809602000202

Attracting Hotel Investment : Insights From Principal-Agent Theory

Tom Baum

University of Buckingham

Ram Mudambi

University of Buckingham

Government agencies are becoming increasingly involved in the process of providing investment supports to attract foreign direct investment (FDI). This paper focuses on the problem of how best to structure the investment supports in the context of the hotel industry. The scenario analyzed has four players-the govern ment sponsor, the local development agency, the hotel enterprise, and the private financier. Five different types of investment supports are analyzed in the specific context of the large hotel and resort industry- grants, subsidies for infrastructure development, taxconcessions, loans, and interest subsidies. In each case, the effect of the cascading principal-agent relationships are assessed in the strategic context.

It is shown that in some cases, governments may prefer support schemes that appear to be more expensive, but have better incentive or risk-sharing implications. The various alternatives may also be combined so as to carefully calibrate the risk borne by the hotel developer, the private lender, and the state.

Key Words: Key words: government investment supports • principal-agent theory • hotel development


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